The future is bright. Technology and industry are moving ahead at a dizzying pace while education and healthcare are improving and people are better informed than ever on how to ensure their present and future health through exercise and proper nutrition. We’re far from a global utopia, but we have the foundation upon which to build a better future for ourselves. People are generally living longer and working in a broader range of industries where risk to health is limited. On paper, the millennial generation is doing great. The trouble is that the economic deck is stacked against them. Unlike the baby boomers and (to a lesser extent) Generation X before them, millennials face a harsh and unforgiving monetary climate in which the traditional safeguards for future prosperity that their parents counted on are harder to come by.
The financial realities for the millennial generation
The millennial generation is currently living in the aftermath of decades of mismanagement, recklessness and deregulation of the financial service industry culminating in the financial crash of 2007-2008. Resultantly, house prices are rising to unattainable heights for all but extremely wealthy property investors, causing the bulk of a generation to rely almost exclusively on the private rental sector. This flood of demand has led to a an increase in private rental prices that is completely incongruous with wage inflation. This results in a loss of disposable income and less capacity to save or invest capital. Millennials also have student debt that dwarfs that of previous generations, negatively impacting on their credit score. Even in places like the UK where college education was free for an entire generation, ideological shifts have led to cripplingly high student debt levels with no guarantee of a sustainable job at the end of the educational journey.
The educational sector, while steadily improving, has done a poor job of educating younger generations on matters of financial management. Outside of basic mathematics, schools teach no regular classes on financial literacy that equips them for dealing with debt management or household budgeting.
There are many reasons why saving for the future is problematic for millennials (and it’s not because they’re overly keen on avocado toast). Many financial advisors (and parents) espouse the 50-20-30 approach to household budgeting, hereby 50 percent of all income goes toward essentials like housing, groceries and debt repayment, 20 percent goes into savings and 30 percent to discretionary purchases (“wants”). The trouble is that when 50% of your income doesn’t even touch your accommodation costs let alone, sundry bills this model is virtually untenable.
Saving. It’s not that easy. But it is doable!
Nobody’s arguing that saving for retirement (as well as a rainy day) is easy, but it is doable, with the right infrastructure. If your employer offers a 401k plan, you we it to yourself to pay as much into it as you can realistically afford as your employer will match at least part of your contributions. Contrary to popular belief you can have both a 401k and an IRA investment although this may come at a cost of contribution limits.
Unfortunately many millennials find themselves working (at least at the start of their careers) in the gig economy with as many as 1 in 3 Americans currently working as self-employed independent contractors who are therefore unable to take advantage of the provisions made by employers. Fortunately, the market has risen to the demand caused by the exponential rise of self employed freelancers and created savings and pension plans to suit them. Since the self employed employ themselves they can even set up their own 401k.
The importance of investment
In a post credit-crunch financial climate, many are eschewing traditional savings for investment and it’s not hard to see why. Why invest your money in a bank when the banks have collapsed under the weight of their own greed and / or incompetence? Investment requires a little more savvy than saving but it can yield some very impressive dividends. Let’s say at the age of 25 a person takes $100 per month from their disposable income and invests it in the stock market. If the investment yields a (completely realistic) 7% annual return, this would facilitate savings of $248,551 by the time they reach 65 years of age! If that same 25-year old is able to scrape together $200 per month this would result in almost $500,000 in savings by the age of 65. In an era where most people will be expected to work well into their 70s this is a pretty impressive figure.